A federal district court issued an injunction on the payment cuts in January 2012, but a three-judge panel of the Ninth Circuit Court of Appeals, in San Francisco, lifted the injunction and okayed the cuts in a Dec. 13 ruling.

The plaintiffs, which include the California Medical Association and a number of other provider groups, requested last month that the entire Ninth Circuit review the case, prompting a refiling of briefs from both sides.

The California Department of Health Care Services plan involved cutting payments for a number of -- but not all -- Medi-Cal providers, including physicians, outpatient clinics, dentists, laboratories, optometrists, pharmacies, free-standing nursing and sub-acute care facilities, and other skilled nursing facilities.

"There is no merit to plaintiff's contention that CMS was required to disapprove the plan amendments because they were motivated by 'purely budgetary reasons," according to Friday's Justice Department urging the court to uphold the cuts. "It is entirely appropriate for a state to review its Medicaid plan to determine whether it can continue to satisfy its statutory obligations at lower payment rates."

The California health department developed a plan to monitor 23 measures of access on a continual basis and to take prompt action if any problems are indicated, the court document argued. The cash-strapped state also determined payment reductions for some services would create access problems and did not seek to drop payment for those.

CMS required Medi-Cal to provide metrics on provider participation and per-capita service utilization to "adequately demonstrate beneficiary access to care." The federal agency said previous court cases gave it the authority to interpret on a case-by-case basis states' requests for payment rate increases or decreases.

Friday's brief also lauded CMS's decision to make beneficiary access to services -- rather than provider costs -- the focus of the agency's support of lower payments.

"This interpretation accommodates the practical realities of the market for healthcare services and the data that will be relevant and available in any given instance," the Justice Department said.

State Medicaid plans are bound by federal law to provide payments "sufficient to enlist providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area."

The California Medical Association (CMA) disagreed and said the decision to cut provider payments by 10% would limit access to millions of Medi-Cal patients.

"Our hope is that state officials and Governor [Jerry] Brown (D) can look at the situation and decide not to move forward with these cuts," CMA President Paul Phinney, MD, said in a statement after the December ruling. "It was a tough budget decision that was made when a dire fiscal situation was faced by the state."

Brown's 2013-2014 budget proposal for the state includes a 10% Medi-Cal reimbursement cut retroactive to Jan. 1, after the December court ruling.

It's too early to tell what implication the case will have on other states' decision to expand their Medicaid programs under the Affordable Care Act.

States that have publicly declined the option to open up their programs to those effectively earning up to 138% of the federal poverty level have cited cost as the factor.

Despite the fact that CMS will pay for the medical care of those newly enrolled, states would have to shoulder the administrative costs and the likely uptick in enrollment from state residents who are currently eligible but not already enrolled. Georgia, for example, found it would cost the state $4.5 billion to pay for the extra 650,000 people that will be added to its Medicaid rolls in the first decade alone.

Republican governors in Florida, Michigan, Ohio, Nevada, North Dakota, New Mexico, Arizona, and most recently New Jersey have opted for the expansion. Meanwhile, some other states with Republican governors, including Texas, Georgia, and Louisiana, have said they won't expand.

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